What Are the Elements of a Contract?
The law of contract comprises a mix of legislation and a wealth of case law that has clarified and expanded the different contractual elements required for a legally binding agreement.
Six distinct elements must be present in English law to create a binding and legally enforceable contract.
Offer
A verbal or written offer from one party to another is required to create a contract. An offer indicates an intention to start contractual relations. The person making it is sometimes called ‘the offeror,’ and the person receiving it is ‘the offeree.’
When an offer is received, the offeror can still revoke or alter it until it’s accepted. The recipient can accept or reject the offer and can issue a counteroffer. If they do so, the original offer is usually terminated. However, in some circumstances, a counter offer is viewed as conditional acceptance.
Acceptance
Upon receipt of an offer, the offeree has the option to accept or reject it. Acceptance can be made verbally or in writing, but relying on verbal communication is more challenging. It’s always better to conduct contractual matters in writing in case you need to prove evidence of the contract later.
Acceptance may be conditional if the recipient varies or qualifies the original offer. Acceptance can also be the result of a specific action or behaviour.
Inaction is not permissible as acceptance of an offer; acceptance must be explicit. An offeror cannot position an offer, so a lack of response is deemed acceptance.
Consideration
In contract law, consideration means what the recipient does in return for the goods or services contained in the offer. Often, this will be a monetary payment, but consideration can also be a promise to perform a specific action or obligation.
The contractual parties can stipulate any consideration they want, but it must be of value in the eyes of the law to create a legally enforceable contract. Consideration must be reciprocal, so the transfer of value must be two-way. If an exchange of value is one-way, then the law considers it a gift, not a contract.
Intention
The offeror and the offeree should intend to create a legally binding contract so that court action can be taken to enforce it if the contract is not performed.
Proving the intention to create legal relationships can be difficult. However, paperwork can support this, and one of the most common ways to do this is to create Heads of Agreement, also called a term sheet.
A term sheet summarises the key terms of the contractual relationship between the parties before they sign the primary contract documents.
Certainty
The terms and conditions of the contract must be transparent, fair, and understood by both parties. A party may challenge a contract’s validity if the terms are unfair or prejudicial.
The Consumer Rights Act 2015 regulates the relationship between businesses and consumers who need more protection than the contractual arrangements between companies. This statute updates previous legislation and case law.
However, corporations can still challenge unfair contract terms in court, particularly smaller organisations that may have less bargaining power than larger companies. These contractual relationships are governed by the Unfair Contract Terms Act 1977.
Capacity
Capacity in English law means the ability to enter into a contract. You must be 18 in the UK to be able to make a contractual arrangement.
Capacity also refers to cognitive function. Contract signatories must be able to understand the terms and conditions. A contract’s validity may be challenged if one of the parties lacks capacity.
People with mental illness, either short-term or long-term conditions like dementia, are usually deemed not to have capacity at law. Equally, an individual who signs an agreement whilst under the influence of drugs or alcohol may render the contract voidable.